Bank of England puts stimulus debate aside at first Carney meeting

By David Milliken and William Schomberg

5 Min Read

People walk and jog past the Bank of England, London June 15, 2012.Paul Hackett

LONDON (Reuters) - The Bank of England's new governor, Mark Carney, and all his fellow policymakers voted against more stimulus for the economy earlier this month, unexpectedly setting aside differences ahead of a potentially big policy change in August.

The 9-0 vote against more bond-buying - the second big surprise of Carney's two-and-half-week governorship - made the pound jump and British government bond prices fall.

The BoE must report to finance minister George Osborne early next month on whether to start giving clear signals on the future direction of interest rates, something Carney did in his previous job as Canada's central bank chief.

Such "forward guidance" can itself act as a monetary stimulus if it means rates remaining low, so that could mean the end of bond purchases as the BoE's main tool for trying to build on signs of recovery in Britain's economy.

"The voting pattern is probably best interpreted as a truce," said Marc Ostwald, a bond market strategist at Monument Securities in London.

"Even those ... members who were pressing earlier this year for an increase in the Bank of England's stock of asset purchases now accept there may be other, more effective, means of delivering monetary stimulus," he said.

A minority of BoE policymakers had tried unsuccessfully to restart the central bank's bond purchases since November.

At the July 3-4 meeting, minutes of which were released on Wednesday, they said the economy still needed more help but they were holding fire until the bank had decided whether to provide clearer guidance on future interest rates.

"Given the already large size of the asset purchase program, there was merit in pursuing a mixed strategy with regards to the different policy instruments at the Committee's disposal," the minutes summarized them as saying.

August's review should shed light on the size and form of additional stimulus, they added.

These policymakers were probably markets director Paul Fisher and David Miles who had been voting for a 25 billion-pound ($37.8 billion) expansion on top of the 375 billion pounds of assets already bought. Former governor Mervyn King also backed more bond-buying.

The BoE's Monetery Policy Committee told markets not to count on a policy change at its August 1 meeting and it would only detail its views on forward guidance on August 7, along with quarterly economic forecasts.

Other MPC members again doubted that bond purchases would be effective, even if the economy did need more stimulus now.

The BoE's potential move away from bond-buying comes at a time when the U.S. Federal Reserve is talking about slowing the pace of its own asset purchases, though the MPC was at pains to state that it did not yet see a case for tighter policy.

indeed, the BoE surprised markets at its July policy meeting when it said bond markets were betting too early on when British interest rates might go up, given the weak state of the economy.

RECOVERY IN TRAIN

British economic data over the past month had otherwise been broadly positive, the minutes said, providing further evidence that the recovery was in line with the BoE's May forecast for 0.5 percent growth between April and June.

Data on Wednesday showed the number of unemployment benefit claims fell in June at its fastest rate for three years. The overall jobless rate held at 7.8 percent.

Policymakers have been immersed in discussions about whether the BoE should use forward guidance based on so-called "intermediate thresholds" such as unemployment, linking future monetary policy moves to indicators other than inflation.

Some economists said signs of improvement in the economy, as well as the likely introduction of forward guidance, further reduced the chance of bond purchases later this year, which earlier this month they placed at around 40 percent.

"The minutes overall support our view that communication and forward guidance will be the main policy tool going forward," said RBC economist Jens Larsen.

Others were less sure, including Investec's Philip Shaw, who was rare among economists in predicting July's unanimous vote.

"We still feel there will be some policy easing. Our view has been that the MPC will sanction a further 50 billion pounds of QE, but we do wonder whether something will come out of left field which alters the mix of the overall stimulus," he said.